How to prevent America's next financial crisis
America is close to turning the page on this economic crisis. While far too many Americans are still out of work and face deep economic hardship, we have now reported three quarters of positive growth and the beginnings of job creation. As the economy improves, we are winding down the Troubled Assets Relief Program, and Congress is moving toward enacting the strongest financial reforms since those that followed the Great Depression.
In fact, we are repairing our financial system at much lower cost than anyone anticipated and expect to return hundreds of billions of dollars in available but unused TARP resources to the American people. That is a rare achievement in Washington.
Our latest estimate conservatively puts the cost of TARP at $117 billion, and if Congress adopts the Financial Crisis Responsibility Fee that the president proposed in January, the cost to American taxpayers will be zero. More broadly, we estimate the overall cost of this crisis will be a fraction of what was originally feared and much less than what was required to resolve the savings-and-loan crisis of the 1980s.
The true cost of this crisis, however, will always be measured by the millions of lost jobs, the trillions in lost savings and the thousands of failed businesses. No future generation should have to pay such a price.
It is simply unacceptable to walk away from this recession without fixing the system's basic flaws that helped to create it.
Thankfully, signs of bipartisan support for action seem to be emerging in Washington, including for an independent consumer financial protection agency.
That is welcome news. The best way to protect American families who take out a mortgage or a car loan or who save to put their kids through college is through an independent, accountable agency that can set and enforce clear rules of the road across the financial marketplace.
But consumer and investor protection, while critical to reform, are only one part. As the Senate bill moves to the floor, we must all fight loopholes that would weaken it and push to make sure the government has real authority to help end the problem of "too big to fail."
To prevent large financial firms from ever posing a threat to the economy, the Senate bill gives the government authority to impose stronger requirements on capital and liquidity. It limits banks from owning, investing, or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers. And it prevents excess concentration of liabilities in our financial system.
All of that means major global financial institutions -- whether they look like Goldman Sachs, Citigroup or AIG -- will be required to operate with less leverage and less risk-taking.
Crucially, if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts. Instead, we will have a bankruptcy-like regime where equityholders will be wiped out and the assets will be sold.
These are important steps, but they are not enough. Ending "too big to fail" also requires building stronger shock absorbers throughout the system so it can better withstand the next financial storm. To do that, the Senate bill closes loopholes and opportunities for arbitrage, and it brings key markets, such as those for derivatives, out of the shadows.